Tax Question. Distribution code in block 7 of 1099-R

joshgo

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#1
I'm wondering if anyone else is running into the same problem I am. I was medically retired at the end of 2010. This is the first year I am doing my taxes with retirement income. I noticed when I was filing, that block 7 on my 1099-R is a code 7 which means normal distribution as apposed to code 3 which is for disability income.

I believe this is due to the error in my 214 when I got out. It said that I voluntarily retired due to length of service. I had it fixed but I don't think DFAS fixed it on their end and it's still not showing as disability retirement. This may not seem like a big deal but as I tweaked with the tax program I found that with a code 7 in there, I'm not eligible for the Earned Income Credit but with a code 3 I am. For me, this is a difference of $8,000!

I think I should be eligible for it due to this IRS Publication 596. It says:


Disability Benefits
If you retired on disability, taxable benefits you receive under your employer’s disability
retirement plan are considered earned income until you reach minimum retirement age.
Minimum retirement age generally is the earliest age at which you could have received a
pension or annuity if you were not disabled. You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum
retirement age.

Beginning on the day after you reach minimum retirement age, payments you receive are
taxable as a pension and are not considered earned income. Report taxable pension
payments on Form 1040, lines 16a and 16b, or Form 1040A, lines 12a and 12b.
I'm calling DFAS tomorrow to see if they need to change it but can anyone else tell me what their code is?

More info:
I'm not eligible for CRSC and I'm not yet getting VA comp.
 

joshgo

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#2
Can anyone answer this? I called and DFAS basically told me the (even though I am 100% disabled) my retirement income is not considered disability income. That it should be a 7 not a 3.

IRS publications say for a distribution code of 3 use Internal Revenue Code Section 72 (m)(7)

72(m)(7) MEANING OF DISABLED. --For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.
Sounds to me like it should qualify... Any help here?
 

Jason Perry

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#3
Not sure, but my instinct is that the distinction is between a 100% schedular rating and a rating for unemployablitly (such as an IU finding and/or disability under SSDI for being unable to engage in substantially gainful activity). Are you working now? Do you have regular income, other than your disability payments?
 

joshgo

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#4
I called DFAS again the next day and talked to someone who knew a little more and was more helpful. He said that the IRS sent DFAS a directive memo in 1991 requiring them to insert a 7 in that block regardless if the person's retirement is from disability or LOS. I asked for a copy of that memo and he's sending it to me. He said he understood my dilemma, that one number different would have my income considered a wages and therefor earned income but they are more concerned with it being taxed properly. So basically there is nothing I can do.

Maybe if my conditions were combat-related (CRSC) and therefore tax-free, that number would be a 3. Oh well. Thanks for your input!